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Cheaper to dismiss?

Legislation came into force in the UK on 29 July 2013, limiting the amount an employee can receive by way of compensation for unfair dismissal to the lower of £74,200 or 52 weeks’ gross pay. A week’s pay is calculated in accordance with statute but where an employee’s pay varies depending upon the hours worked or the amount of work done, then the figure is calculated over a 12 week reference period. The change in compensation will only affect employees whose effective date of termination (determined by statute) is on or after 29 July 2013.

Historically, the cap on compensation for unfair dismissal has been a pure monetary amount – with no reference to earnings. That cap has ordinarily been increased in February each year (and from February 2013 has been £74,200). The government accepts that the yearly increase in the compensation cap (partly due to a one-off jump of £38,000 in 2000) is out of kilter with inflation. More importantly, however, the current cap is also vastly in excess of the median tribunal award for unfair dismissal compensation.

For many years the median compensation awarded by the tribunal for unfair dismissal has been around £5,000. With that in mind, it is tempting to wonder why the government is bothering to introduce a 52 week pay cap in addition to the current monetary limit. In reality, it seems that the goal is purely psychological – the ministerial statement (issued on 12 July) states that “the cap aims to give employers and employees more realistic expectations about unfair dismissal award levels”. To bolster this, the guidance notes to the employment tribunal claim form now contain details about the median awards.

Time will tell whether employees expectations are tempered by this change. It could become apparent, for example, in an employee’s approach to settlement discussions. Aside from that, the implications are unlikely to be substantial. In summary:

It seems unlikely that the 52 weeks’ pay cap will deter employees from issuing proceedings – particularly for lower earners.

It is possible that, especially for higher earners, there may be more of a temptation to shift the focus of claims towards discrimination.

On the upside, particularly for lower earners it will now be much easier for employers to calculate their potential exposure (assuming, of course, that the claim is solely one of unfair dismissal).